Skating on Thin Ice

As 2009 moves past its midpoint, many market participants are briskly trying
to forget the carnage of 2008 and the first quarter of 2009. But, before we
get lost in the euphoria of the 36% Dow rally in the Spring/Summer of this
year, a little hindsight is in order. In March, the Dow had plunged to 6,547,
or some 53 percent down from its nominal 14,164 high in 2007. Despite the recent
gains, we are still nearly 40% below the 2007 peak. This is a brutal truth
that everyone seems to be ignoring.

Last week, Merrill Lynch, that storehouse of economic sagacity, announced
that the recession was over. Even the bearish NYU economist Nouriel Roubini
was reported as saying "the worst is behind us." However, wishing earnestly
for something does not make it so.

Admittedly, the financial meltdown that threatened in late 2008 appears to
have been contained. In addition, the Fed's actions in the credit markets have
held interest rates down and turned the yield curve positive. The credit markets
also have started to ease. In addition, the federal government's injection
of trillions of dollars into the economy has "boosted confidence" for those
too short-sighted to know the consequences. This welcome news has provided
impetus to equities.

In combination with reassuring remarks by senior administration officials
and retail investors' wish not to be left behind, money has started to move
back into American equities. The resultant rally in stocks seems to have validated
the preceding optimism.

Among these desperate green-shootniks, the smoking gun of recovery can be
found in the exceptional earnings reported last week by Goldman Sachs and JPMorgan
Chase, both of which surpassed estimates by healthy margins. These reports
may have led to a general market rally, which even bad news about CIT failed
to defuse.

In looking realistically beneath the Wall Street and political hype, seven
fundamental points emerge which investors should note carefully:

First, much of last week's rise was based on small 'up' volume. This indicates
that the surprisingly good earnings reports led the 'shorts' to cover in near
panic. Traders, knowing that the 'shorts' had to cover at any cost, lost no
time marking prices up, which pulled in investors anxious to catch the wave.

Second, we cannot forget that the banks in receipt of TARP funds, including
Goldman and JPMorgan, have been able to invest these surplus tens of billions
of dollars in the markets, allowing them to capitalize on the great run-up
of the last few months. But this is a temporary phenomenon. Given JPMorgan's
warning about commercial property lending, it is questionable that the great
bank earnings of the second quarter can be repeated. Meanwhile, Goldman Sachs
is effectively a giant hedge fund, relieved of potentially massive losses at
AIG. Masquerading as a bank, it has privileged access to Fed Funds at or near
zero percent -- talk about public financing! Therefore, no one should take
these earnings as anything other than a one-time windfall from a rigged system.

Third, some of the major banks, such as Citi and Bank of America, appear to
be falling behind government demands for recovery plans. This, combined with
the massive exposure of U.S. banks to the declining value of commercial real
estate, raises the possibility of another round of bank bailouts.

Fourth, statewide budget crises, such as the one that is coming to light in
California, are likely to hit every state with a big city, save perhaps Texas.

Fifth, many investors have become shell-shocked by the 40 percent erosion
in their portfolios. They can be forgiven for not jumping back into the equity
market action for awhile.

Sixth, the recent spate of federal deficit spending has placed an enormous
strain on Treasury debt markets. The United States now faces a sharp interest
rate hike, or a loss of its prized Triple-A credit rating. Consequently, investors
see increasing opportunities for profit in overseas stock and government bond
markets. This potential diversion of funds from American stock markets will
tend to lessen the chances of a strong recovery at home.

Finally, while the U.S. stock markets may be rising, the economic picture
is far from promising. It is becoming increasingly apparent that short-term
recovery is unlikely to occur without significant increases in consumer spending.
With unemployment still rising at about 500,000 workers a month, this is unlikely.

Most importantly, long term recovery is impossible without significant structural
changes in the economy. Such movements are nowhere to be seen.

For a more in-depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2007 bestseller "Crash
Proof: How to Profit from the Coming Economic Collapse" and his newest
release "The Little Book of Bull Moves in Bear Markets."Click
here to learn more.

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of Peter's playbook with his new Special Report, "Peter Schiff's Five Favorite
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global investors, and learn about the Euro Pacific advantage, at www.europac.net.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.